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tv   Washington This Week  CSPAN  February 12, 2012 10:30am-2:00pm EST

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were moved through. -- there were a number of bills move through. the senate process is so clunky that when something comes up on the floor, it makes it difficult to imagine anything moving through the congress. >> what about smaller legislation? >> he was pessimistic about even a bill from rob portman from ohio. it is nerdy from an energy perspective. they are pessimistic about something even that small. >> thank you very much. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012] >> this week on prime minister's questions -- >> senator lott revealed his
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nostalgia for state's rights. >> josh marshall on the internet and his website's emergence into the breaking news business. >> the media is a different world today that it was 10 years ago. things like that happen all the time now. there are certainly many big stories that tpm has had over the last decade. we are breaking stories right and left. it has almost become commonplace. it is not nearly as surprising today as it was back then. >> more about tpm and josh ."rshall on c-span's "q & a
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>> david cameron discusses changes to the national health service. the prime minister paid tribute to queen elizabeth ii on the 60th anniversary of her accession to the throne. tonight at 9:00 p.m. on c-span. testifying before the senate budget committee, ben bernanke first the senate to resolve differences over payroll tax cuts saying and uncertainty could slow the economy down. he also discussed the state of the labor market and unemployment levels. this is just over two hours.
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>> we want to welcome the federal reserve chamber -- chairman, ben bernanke, back to this committee. this is the fourth time that you have testified before the committee. we are pleased to have you again. this is timely for your appearance because of the nature of the recovery. i will, without objection, insert the full remarks of senator conrad's opening statement. i will turn to the ranking member for his statement before mine. senator sessions. >> thank you, mr. chairman.
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i hope chairman konrad feels better. i value his leadership -- chairman conrad deals better. i am eager to hear your thoughts, mr. bernanke, on our financial situation. the congressional budget office confirms our deficit will top $1 trillion for these fourth consecutive year. we have never seen anything like that. in three years, we have accumulated almost $5 trillion in gross debt. the total number of americans actually working has decreased by 1.2 million people. we have fewer people working today than we did 11 years ago. actual working americans is down. that goes for the administration of both parties.
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federal spending in real dollars has increased 53% in till it -- in 10 years. real wages have declined. the government is getting bigger. the middle class is getting smaller. the problem i have and the concern is also wrestling with is that even our financial experts are often wrong as to the danger placed on the american people and our economy. some in washington and wall street tell us we should delay reforms and not take action. until a date in the future. there were federal reserve meetings in 2006. they seem to indicate that we cannot always be sure that those in positions of leadership see the problem clearly.
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in 2006, as america verged on a massive housing meltdown, secretary geithner told his colleagues, we do not see signs of collateral damage. we are not expecting much. two months later, he was announcing the fundamentals of the expansion going forward and that they still look good. janet yellen was perhaps more enthusiastic. when chairman greenspan left, she said, is bidding for chairman greenspan to leave with the economy in such solid shape. the situation you are handing off to you a successor is like a tennis racket which they gigantic sweet spot. in 2001, chairman greenspan testified before this committee
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that we were looking at more than a decade of surpluses and wrestled with the question of what we would do after we had paid down our debt. i am just saying we are not always good at predicting the future. they were wrong. you were wrong during some of these times also. common sense tells me that more borrowing and more debt will make us weaker, not stronger. the future is hard to predict. we cannot predict the day a debt crisis will erupt or what unknown events might set it off, we know we are on a collision course with reality. the longer we wait to change that courts to develop a plan
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for a sensible but at the future, the more grave danger. the majority leader has locked the wheels. he says the democratic senate will decline the budget resolution for the third straight year. not once has this occurred since the congressional budget act was passed in 1974. i am glad that chairman conrad has indicated he would voted for the markup. the majority leader says the majority process will be shut down. majority leader read has declared a senate democrat budget and the president also budget dead on arrival. budget dead on arrival. if we do not have a different approach, the fundamentals of leadership asked that their
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leaders should be taken from them. the president's budget submission on monday will be a test. either he will rise to the occasion or he will share -- shirk his duties. it is unimaginable that the president will not lay out a serious budget plan for a future that will get us off of this unsustainable path to decline. he did not even mention this in his third state of the union address, the dangers of the debt. the chairman of the joint chiefs admiral mullen said the greatest threat is our national security. real change will not occur
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without the leadership of the president. he has not only not lead, but he attacked those like paul rand who has led public -- paul r yan, who has led. hopefully, his budget will lay out a plan to change our unsustainable debt course. we are in a difficult challenge. we have faced a number of difficult problems. i am hopeful that the president's budget will lay out a sound course for america's financial future. not doar's budget did that. i hope it will this year. thank you for letting me shared those remarks. chairman bernanke, we value your opinion.
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it can help us work our way through the most dangerous systemic that challenge i believe the nation has ever faced. >> thank you senator sessions. i am optimistic. you said you are not optimistic. >> about the budget the president is cementing? -- submitting? i said i was not optimistic that he would get us on a plan -- awful they planned up an unsustainable debt course -- of plan of unsustainable debt. >> it is summed up in this chart. this is private sector jobs. for about a year and half, there
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were massive job losses in the private sectors. this only starts in january of 2009. you can take it back even further into 2008. that is when the crisis started, in the fall of 2008. this goes to march of 2010. the jobs picture dramatically changed. there is the trend line to the point of which we have 257,000 in this past month. of job increases. that shows a trend that is reflecting the optimism that is starting to bubble up all across america.
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mr. chairman bernanke, your job has been tough over the last few years. the consumer confidence that has been shaken, events in japan and europe threatening to derail our economy, and the partisan bickering we have seen on the national stage and even on state stages from time to time. i truly believe that when the history of this period is written, you are going to be remembered as a critical figure because your role has been so prominent in helping avert the complete collapse of our financial system. for that, we are enormously grateful. we continue to have major fiscal
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challenges facing the country. a long-term budget crisis brought on from the rising cost of health care and an outdated tax system and to years of and anal expediencce economic challenge of a slow recovery, as the chart indicates from the 2008 financial crisis. if it had not been for the bipartisan cooperation after september of 2000 a -- 2008 when we nearly went into a financial debt spiral andan an incoming
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democratic administration and the two of them working together to reverse bad -- that debt spiral. cbs reports shed some light on the budget challenge. if we continue on our current path without letting current law come into effect, gross federal debt is expected to reach 103% of gdp this year and will rise to 120% of gdp by 2022. as for the economy, it is clear we have come a long way from the depths of 2008 and 2009. the recovery shows signs of strengthening. it is a long and difficult road back. this is a frustratingly slow
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pace of a recovery. economists have testified here that recessions cause by a severe financial crisis like we had, a crisis steeped in the housing sector, which is ours, tend to last longer and require a greater amount of recovery efforts and -- than a typical recession. not only does this chart show positive signs we are seeing, we are also seen the unemployment rate coming down. we have seen 10 the second quarters of real gdp growth. consumer confidence is showing signs of improvement. u.s. automatic that jurors are returning to profitability.
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-- manufacturers are returning to profitability. it is amazing that a two manager commercial during the super bowl can generate such political controversy when it is celebrating the fact that there is a recovery in the joint in the auto -- in detroit with the auto manufacturers. we can not become complacent. there are significant risks. housing continues to pose a threat. time after time, when things have been tried, they have only been partially successful at best. too many homes are in foreclosure or underwater. the political deadlock that we have here that many of us have
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tried to break by coming together in a bipartisan approach. it is what a lot of us urge the super committee to do. -- us urged the super committed to do. there was a budget act. it was in the budget control act. it had a disciplines process, which was the super committee, which we desperately hoped would work. the deadlock was there. there is an imbalance of budget cuts that could be a drag on this economy. of course, the situation in the middle east could result in a disruption of oil supply. the european debt and fiscal crisis. all of these elements are on certain elements that could
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disrupt the -- uncertain elements that could disrupt the recovery. two things would be to extend the payroll tax cut and unemployment benefits. year.he remainder of this then seriously moved to redo the tax code and to reform this bloated tax code. we should consider efforts to rebuild the country's infrastructure. mr. chairman bernanke, in looking forward, it is clear we have to pursue policies that bring the best that strength in the economic recovery and address the long-term this imbalance. a policy bad wid -- that
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widened the deficit for a few years would be beneficial, especially if it were combined with a plan that would narrow deficit relative to the current projections. combining those pieces is important. it would provide the strongest boost to economic activity in the short term. that is being -- the cbo director's words. we want to hear your views. i hope you will speak further about what the cbo director said. >> thank you very much. i appreciate this opportunity to
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discuss my views on the challenges facing fiscal policy makers. over the past two and half years, the u.s. economy has gradually recovered from the recent recession. conditions have improved over this period. the pace has been frustratingly slow, particularly from the perspective of workers who are unemployed or underemployed. the economy is vulnerable to shocks. supply chain disruptions stemming from the earthquake in japan and a surge in oil prices risked day renminbi economy. the market -- risked derailing the recovery. market participants expect
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stronger growth this year than 2011. the outlook remains uncertain. the ability and willingness of households to spend will be an important determinant to the pace becoming will expand. the-the pace the economy -- the pace the economy will expand. access to credit remained tight for many potential borrowers. household spending will depend heavily on the elements in the labor market. the job situation appears to have improved modestly over the past year. private payroll employment increased by 160,000 jobs in 2011. the unemployment rate fell by
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one percentage point. new claims for an assurance that unemployment -- new claims for unemployment insurance fell. particularly troubling is the unusually high level of long- term unemployment. more than 40% of the unemployed have been jobless for more than six months. on certain job prospects, there is a holdback in the demand for housing. a drop in home prices has improved the affordability of houses. president of sales and construction remained depressed. the supply of homes from foreclosures is limiting demand for new construction.
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the business sector has been a bright spot in the recovery. manufacturing production has increased 15%. capital spending by businesses has expanded briskly, driven by the need to replace aging equipment and software. many u.s. firms had benefited from strong demand from foreign markets over the past few years. more recently, the pace of growth and business investment has slowed. there are signs that these concerns are abated somewhat. business confidence continues to improve carry it there can be an increase in capital spending and hiring. -- business confidence continues to improve. there can be an increase in the capital spending and hiring.
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smaller business continued to face difficulties obtaining credit. credit conditions have begun to improve modestly. economic activity appears to be slow due to spillover and financial developments in europe. high debt levels and we growth prospects -- weak growth prospects lead to concerns about the help of european banks. resolving these problems will require a certain action on the part of european authorities. they are working hard to address their fiscal and financial challenges. the delegates in europe may unfold unfavorably. we are in creasing the best we
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are in increasing contact with european authorities -- we are in frequent contact with european authorities. inflation has been moderated considerably over 2011. a surge in gasoline and food pushed consumer inflation higher. around the same time, despite -- supply disruptions put upward pressures on motor vehicle prices. the impetus for these influences faded during the second half of the year. inflation was 3.5% in the first half of 2011 and 1.5% in the second half. in an environment of inflation expectations and slack in labor
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and product markets, we expect inflation to remain subdued. against that backdrop, the fomc decided to maintain its stance on monetary policy. we will maintain the existing policy to reinvest principal payments on securities and keep the target rate at 0% to 0.25%. as part of our ongoing effort to increase transparency, following the dentary meeting, the fomc attended to provide greater clarity about long-term goals and strategies. we will pursue our congressional mandates for stable prices and
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maximal employment. the fomc stated its collective view that inflation at 2% is most consistent over the longer run with the federal reserve statutory mandate. current estimates for unemployment are between 5.2% and 6%. the committee will take a balanced approach in its effort to return inflation and employment to their desired levels. in the remainder of our remarks -- my remarks, i will address the challenges facing your committee and our country. the federal deficit widened during the recession. it was 9% of gdp over the past
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three years. this increase has reflected the cyclic low response of revenues and spending to a weak economy -- cyclical response of revenue and spending to a weak economy. the budget deficit should narrow the next few years. even after economic conditions have returned to normal, the nation will face a sizable structural budget gap. using information from the recent budget outlook by the congressional budget office, one can construct a projection for the federal deficit assuming that most expiring tax provisions are extended and that medicare's physician payment rates are held at their current level. under these assumptions, the budget deficit would be more than 4% of gdp in fiscal year 2017, assuming that the economy is then close to full employment. of even greater concern is that longer-run projections, based on plausible assumptions about the evolution of the economy
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and budget under current policies, show the structural budget gap increasing significantly further over time and the ratio of outstanding federal debt to gdp rising rapidly. this dynamic is clearly unsustainable. these structural fiscal imbalances did not emerge overnight. to a significant extent, they are the result of an aging population and, especially, fast-rising health-care costs, both of which have been predicted for decades. notably, the congressional budget office projects that net federal outlays for health-care entitlements -- which were about 5% of gdp in fiscal 2011 -- could rise to more than 9% of gdp by 2035. although we have been warned about such developments for many years, the time when projections become reality is coming closer. having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences. over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and
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thus reduce productivity growth. to the extent that increasing debt is financed by borrowing from abroad, a growing share of our future income would be devoted to interest payments on foreign-held federal debt. high levels of debt also impair the ability of policymakers to respond effectively to future economic shocks and other adverse events. even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis. as we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy. although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the u.s. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory will move the nation ever closer to that point. to achieve economic and financial stability, u.s. fiscal policy must be placed on a sustainable path that ensures that debt relative to national
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income is at least stable or, preferably, declining over time. attaining this goal should be a top priority. even as fiscal policymakers address the urgent issue of fiscal sustainability, they should take care not to unnecessarily impede the current economic recovery. fortunately, the two goals of achieving long-term fiscal sustainability and avoiding additional fiscal headwinds for the current recovery are fully compatible -- indeed, they are mutually reinforcing. on the one hand, a more robust recovery will lead to lower deficits and debt in coming years. on the other hand, a plan that clearly and credibly puts fiscal policy on a path to sustainability could help keep longer-term interest rates low and improve household and business confidence, thereby supporting improved economic performance today. fiscal policymakers can also promote stronger economic performance in the medium term through the careful design of tax policies and spending programs. to the fullest extent possible, our nation's tax and spending policies should increase
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incentives to work and save, encourage investments in the skills of our workforce, stimulate private capital formation, promote research and development, and provide necessary public infrastructure. although we cannot expect our economy to grow its way out of our fiscal imbalances, a more productive economy will ease the tradeoffs that we face and increase the likelihood that we leave a healthy economy to our children and grandchildren. thank you, sir. >> on page four, you testified the current estimates of the normal rate of unemployment is between 5.2% and 6%. how does that compare to unemployment during the years of the 1990's? do you think we're destined to
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have higher unemployment than in the 1990's? >> unemployment did reach levels below that in the 1990's and in the 2000's as well. we are concerned that over the past few years there has been a modest increase in the long run unemployment. one factor is that about 40% of the unemployed have been unemployed for six months or more. they lose skills and it is more difficult for them to find steady employment in the long term. in estimating the long run rate of unemployment, we are in no way saying this is a desirable state of events and circumstances. we are only saying monetary policy cannot do much to bring
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unemployment below those levels based on our current information. other policies affecting workforce skills, the structure of the labor market, all other kinds of policies could bring down the sustainable rate of unemployment. i hope congress will consider ways to address that problem. >> we've started to see a revival of the manufacturing sector, 50,000 jobs added last month. is there anything you would suggest that we do to hasten the return of the manufacturing jobs? >> the recovery of the manufacturing sector has been an encouraging development. it has led the recovery is significantly. one reason is that american manufacturers have become increasingly competitive on the global stage.
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as emerging markets grow quickly, they represent a source of demand for our manufactured goods and services. maintaining open trade, maintaining those markets is an important step. another area that is important is trying to ensure the u.s. remains a leader in advanced education, research and development, technology, and a light -- the like because many high-tech firms clustered around universities are producing the most sophisticated products. that is where we have an advantage in the united states. maintaining our technological leadership will be a boost to our ability to export. >> you know the decisions we
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will have to make with regard to budgetary policy coming up. you know there were all these attempts to get agreement between the white house and the congress last year that did not make it. there was one plant a number of us -- there was one plan where we were wanting the super committee to go bake with the cut over the next 10 years. would you recommend going forward steep cuts that only hit and a handful of the safety net programs? do you believe we should place more on reducing future deficits over the long term in a more
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broadway -- broad way while being fiscally conscious of the efforts in the near term? >> i was supportive of being aggressive last summer. a number like $4 trillion was the cbo estimate of what would be needed to stabilize debt to gdp ratios over the next decade. that is an important objective obviously. i would like to urge the committee not to be solely attentive to the 10-year cbo window. most of the problems arise after the next 10 years going out 20 or 30 years as the population ages and health care costs rise. i would advocate having a broad- based discussion and looking at
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sustainability over the long run. that will take a lot of work on the part of congress. it is not my place to make detailed recommendations about specific components of the budget, but i do urge the congress that we need a long- term plan to put our debt to gdp ratio and overall fiscal burden on a sustainable path. >> thank you. your remarks have been very insightful. we all have different opinions, but i think you are close to what we need to be doing. we value that. i would yield to senator grassley at this time. >> i want to compliment you on
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your movements towards transparency. the more you can do about -- of that to let people know about the economic impact of your policies so that there is not the obscurity that exists, but to do it to educate the public about important role of the federal reserve, you are too important for people to think this some conspiratorial as part of everything the federal reserve does. this comes up too often in my town meetings. the more you can tell people about what your role is, it is very important. my question is if congress fails to act, our nation is going to
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see the largest tax increase in the history of the country. that will happen without even a vote of congress. the congressional budget office has estimated the economic impacts of this tax increase along with a few other policies, the cbo estimates the unemployment rate at the end of 2013 could be two percentage points higher and the gdp growth could be three percentage points lower. do you agree with cbs that the failure to prevent the tax increase will have a serious negative impact on our economy in terms of gdp growth and unemployment? if so, at what point in 2012 will the uncertainty of the tax increase begin to hinder economic growth? >> i have agreed to give a series of lectures at george
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washington university next month. i will be talking about that issue. i agree with the cbo's analysis. if no action is taken, on january 1, 2013, there will be a sharp change in the fiscal stance of the federal government. with no compensating action, it would slow the recovery. cbo predicts 1.1% growth and an increase in unemployment in that year. that is based on their current lot of assumptions. i am in no way stepping back from my strong advocacy of maintaining fiscal sustainability in the longer term. it is critically important that whatever actions are taken to mitigate the short run in packs and some of these changes be combined with a credible plan
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for a longer-term plan to return for sustainability. there is a sharp change in the fiscal position in a short time that might slow the recovery. i do not know when the uncertainty would become a factor, but as we get closer to january 1 without a road map on how congress will proceed, that would affect planning, business and household decisions as they look ahead to the next year. >> my second question will have to be my last one. you recently announced the goal of inflation and target of 2% stands above the fed target. you also announced the federal funds rate will likely be held near zero for 2014.
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you said if there is a trade-off between decision making on unemployment and inflation, unemployment would have a higher priority. is the fed sending a signal that keeping inflation in check is a secondary priority to achieving full employment? to what extent is the fed willing to act if inflation continues to rise? >> a 12-month bout with look at inflation shows inflation a bit above 2%. -- a 12-month backward look at inflation shows inflation a bit above 2%. our region because monetary policy works with a lag, we have to think about where -- because
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monetary policy works with a lag, we have to think about where it will go. we expect to be at 2% or below in the next couple of years. we think that is consistent with a policy of accommodative policy. we say explicitly we take a balanced approach. congress gave us a dual mandate. we work to bring both sides of the mandate back towards the target. the main goal the statement was not to announce a change in policy. it was to give greater clarity in how we define the long run objectives. we will be working to bring both parts of our mandate towards desired levels. >> i think it is good you are going to the george washington university. if you want to come to the grassroots of america at the university of northern iowa, i can arrange that for you.
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>> we will have a streaming online. it is open. >> thank you. i want to ask more about the shock to the economy may have been discussing. you talk about the pace of the recovery being slow, particularly for millions of people are hurting. all this comes together as a sluggish expansion that has left the economy vulnerable to shocks. i can see plenty of shocks. the payroll tax debate is bogging down into a quagmire in talking about another short-term effort. europe is another one mentioned. there is the question of sequestration.
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to me, that puts a very negative spectacle out. it would mean in a lame-duck session of 2012 that congress would see the same kind of flailing as after 2010. my first question is on the stock issue. does it serve to shock our economic system to have all this delay and bickering and inability to get decisions on payroll taxes? is that in and of itself a shock to the system in terms of what it does to business confidence? >> policy uncertainty is certainly something of businesses complain about. it makes it harder to plan. we face the same issues as
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regulators with regulatory uncertainty. to the extent greater clarity is provided, it would be helpful to the economy. >> is it fair to describe that as another shot to the system? >> everything has been to try to figure out how to force action forward. when you do not, you are likely to see these shocks and a reduction in confidence and predictability. is it fair to say that the late in this kind of climate -- that the delay in this kind of climate is a shock to the system? >> the debt ceiling debate last summer was clearly a shock that affected consumer confidence and financial markets. more generally, loss of confidence that an agreement
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will be reached or what agreement will be reached is a negative for confidence. >> to me, the anecdote to economic shocks are cushions, the kind of cushions that start us on the road to predictable opportunities to promote economic growth. tax reform strikes me to be right up at the top of the list. the super committee has done good work on this. a lot of the work has been done now. there are tough political calls to be made to address tax reform, but the principles are pretty clear. much of what we had done in 1986 to clean out the jump j -- junk, would long-term
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predictable tax reform be the kind of cushion that would help address the shocks you are concerned about? >> predictability is good. also a good tax code promotes growth. most economists agree with a simpler, fairer tax code would be constructed for growth. >> on the converse of it all, we go through another round of temporary credit, temporary extensions, modifications to provisions, would that contribute to the uncertainty and a lack of predictability that would make it hard for us to grow? >> as you fully appreciate, policy is complicated and not everything is feasible from a political point of view. from an economic point of view,
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the more comprehensive and clean the reforms can be, the more likely they will reduce uncertainty. >> i think your points are well taken. my concern is absent the kind of comprehensive reform i think would be a stronger cushion to the shock you are talking about, i hope the country will see how important is to steer away from the more piecemeal changes that make the broken tax system even more dysfunctional and do not give businesses and consumers the predictability they need to generate the growth you are talking about. >> senator johnson. >> thank you for coming here to testify. i do not envy your task of
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trying to address fiscal mismanagement with monetary solutions. it just does not work long term. i think we are seeing that starting to collapse in europe as people try to come to the rescue of greece. i am not sure how far behind we are from greece. long-term sustainability seemed to break down between how much revenue we can raise and how much we spend. to me, is clearly a spending problem. last year, we spent $2.6 trillion. in 10 years, we will spend $5.8 trillion. i am concerned that we delude ourselves into thinking we can increase revenue by raising tax rates above the 50-year average. our long-term spending is 20.2%. over the last 50 years, we have run this structural deficit.
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there was an interesting article today about maryland's attempt to tax millionaires. when they did that in 2007, they estimated the raised $330 million by doing that. the study said they raised about $100.20000000. -- the study said they raised about $120 million. i like to get your opinion on how to extract long-term revenue. >> on the broad question of spending and taxes, there is a deep philosophical debate about the proper role and size of government. you are aware of that. that is something congress will have to work out. people like for you to figure out the right role of government in the economy. i think it is true that beyond a
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certain point, higher taxes imposed costs on the efficiency of the economy. those are tradeoffs congress has to consider. in a situation like a state where millionaires can easily cross the border and lived in virginia instead of maryland, it is clear much of the gain could be lost by legal avoidance practices. >> as a business manager, i am always looking for the root cause of the problem and geometrics. you mentioned one earlier, the size of our debt in relation to gdp. there is an even more fundamental one that speaks to the root cause of the problem. i would argue that is all of the intrusion of government and the cost of government. we have increased that to 25% in 2009. it will increase to 35% by 2035.
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do you think 25% and higher is a healthy metric? >> under the current plans if there is no change to the entitlement programs, then demand for spending and the amount of spending the government is committed to will rise beyond that level. a some point, congress will have to make a trade-off between the spending programs and the taxes they are willing to raise. i am in favor of the law of arithmetic. if you want a low-tax economy which has benefits from an efficiency perspective, you have to make tough decisions on the spending side. if you want to spend more, you have to figure out how to raise taxes and raise revenue. i mainly try to urge congress to make sure they're looking at both sides so there is a balance
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between the two. >> the tough decisions begin with presidential leadership. i am new to this town. i have never seen anything accomplished in washington without strong presidential leadership. i am afraid president obama has been failing in terms of the debt and deficit issue. in terms of the uncertainty caused by the senate not passing a budget, can you speak to the lack of an actual plan to make sense to business people, can you speak to how harmful that is for business growth? >> i will not comment on parliamentary maneuverings, but he asked the same question about
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whether it is a negative for growth. i think is. people like to be able to plan. we need to make regulations as clear and effective as possible. >> thank you, mr. chairman. >> thank you for the conversation we had several weeks ago with regards to transparency. i am excited to see you will be out on the circuit. i may tune in to one of those to see how they go. i want to make sure there is equal treatment. i am new here, too. i am not here to defend the president, but we're all to blame for this dysfunctional washington. congress is also part of the problem. that is what i hear when i go back home.
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i want to clarify or make sure i hear what you are saying. that is because of the inability of this body to figure out a compromise and pathways with long-term certainty, it does have an impact to consumer confidence and business confidence of this country. >> yes. >> i have learned legislative bodies or love to blame the executive. the executive was to blame the legislative body. at the end of the day, there are 100 of us to make decisions. it is incumbent upon us if we intend to move this country forward to be more certain about our long-term decisions. that is important. i have been a small business person from the age of 16. i know that in decision does not create certainty.
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this body has a great habit of in decision. i want to make sure we're all equal in this. i heard and want to make sure i am clear on this with regards to your comments on the bush tax cuts. the other problem is they did not pay for them. we have a long-term problem. that is what your opening statement alluded to. the long term. wall is coming. -- the long term. wall is coming. you have a tax scheme that cost $4 trillion and you do not pay for it today, he will pay for it tomorrow with interest. is that also a problem? as you deal with tax policy, you have to pay for it.
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>> i was not endorsing any component. i was saying the cumulative effect of all of these things with the expiration of the bush tax cuts and other things, collectively it would be a sharp change in the near term fiscal position. i am not saying to not pay for it, i am saying do it over a longer period of time and do it seriously. to just pushwant it off. you want to make a credible, strong plan that phases in so that the economy will not hit a huge pot hole. >> i was one of those who supported the $4 trillion. we need to be aggressive. we also need to balance against what we're trying to do today. there are good signs. and read the interview with
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bloomberg about how the economy is moving. it is moving in certain areas. manufacturing surprised a lot of people. that is a good sign. consumer confidence is a pretty important piece of the equation. if they are not confident, it is amazing how many are still not refinancing today at 3.75% interest rates. it boggles the mind. i think they're not confident yet. part of our job is to let them know we have a plan to help confidence levels. is consumer confidence and business confidence an important part of the long term? >> consumers make spending plans and employment and retirement plans based on what they see in the future and how they expect the economy to evolve. if you look at the consumer
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confidence surveys, people are saying they do not expect to see their real incomes grow. they expect their financial conditions will be flat and ttened down in the next few years. >> i come from an energy state with oil and gas. you have alluded to the fact that activities in the middle east could impact our fuel prices. i am a big believer we need to do more domestic production so we have less of the shocks from sources of our control. can you give any additional comment on that? >> we saw a significant increase in oil prices can be disruptive because it creates inflation and act like a tax on consumers. it makes them less able to spend on other things.
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an increase in prices substantially could stop the recovery. one of the more encouraging things in the last few years is the fact that with new processes and approaches, the u.s. is becoming a more prolific producer of fossil fuels and is also making progress on non- fossil forms of energy. for the first time in some time, i think there is a chance to move in the right direction in terms of reducing exposure to foreign supply disruptions. >> senator enzi. >> i want to thank the chairman for all the information you give with repeated appearances before the senate and house. it is all very helpful. i know everybody hangs on. in much everywhere that you say.
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-- i know everybody hangs on pretty much word that you say. that has to be daunting. i think in six parts, we could have passed it and averted a lot of this. it was an austerity program. that makes it tough. to avert a fiscal catastrophe, most european governments enacted austerity programs to reduce government spending. recent bond auctions enjoyed surprising demand resulting in yields below expectations. the new york times suggested this is a sign the austerity measures have come. investors and lure them back into euros on bond. despite the passage of the budget control act, federal spending is expected to grow in
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2012. do you believe the u.s. has really entered a time of austerity as some have suggested? >> i think progress in some troubled countries towards fiscal balance has been encouraging to investors. there are other important factors. he european central banks' large loans have helped to stabilize the system. they've used that to buy sovereign debt from countries like greece and portugal and ireland. it is a fairly complex situation. >> if they had not passed austerity budgets, -- >> countries like greece and portugal have no option. they cannot borrow. they are excluded from the private market. they are relying 100% on the imf
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and european union for funding. to qualify for the funding, they have to show they have a plan to restore fiscal balance. they had no choice. they're working to get to that position. in terms of the united states, i described my concerns about 2013. i would say overall fiscal effects on our economy are roughly neutral at this point. from the long run perspective, we have not yet taken actions to put the government debt on a sustainable path. >> the federal reserve takes in deposits as liability and lends out of funds by purchasing treasuries and securities. the federal reserve remits those profits to the treasury. those payments are classified as government receipts or revenues in the federal budget. remittances have more than doubled since 2008.
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cbo estimates the federal reserve will remit $77 billion in 2012. they estimate there will be $511 billion over the next 10 years. what are the federal reserve's major sources of revenues? >> the federal reserve has remitted in the last three years about $200 billion to the u.s. treasury. i think that includes the money paid to cfpb. i will double check that for you. the reason our remittances have gone up by so much is that in recent years, we rarely permitted more than $25 billion in a year. it has gone up because as part of our monetary policy, we have purchased treasury securities
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and mortgage-backed securities. the return on those securities comes to the fed. we pass it back to the treasury. that is where the profit is coming from. the various programs we undertook during the crisis have all turned out to be profitable. we have put that money back in the treasury as well. >> how effective do you think japanese efforts were to stimulate the economy during the 1990's? i do not think there economy has recovered. i think japan deserves some real consideration. >> japan has had a difficult two decades. there are important differences between japan and the united states. one i would stress is that japan has had deflationar and falling prices for some time. combined with interest rates, that creates financial
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tightness that prevents investment and growth. the japanese were not as quick as the u.s. to recapitalize their banks as we did in 2009. they were the first into the situation. they did not have the benefit of seeing others deal with it. we learned from them. they continue to provide monetary policy support. it is important to note one other difference is that japanese demographics are quite different from the u.s. the work force is beginning to shrink because they have low birth rates and low population growth rates. that is going to be a factor that will keep their growth down in the period to come. >> thank you. my time has expired.
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>> thank you for your testimony. i wanted to start with the unemployment insurance conversation going on. mrs. the set of things you referred to as changing on the near horizon. -- this is the set of things you referred to as trading on the near horizon. how do you see that piece of the puzzle fitting into the issues that would affect the economy? >> unemployment insurance is multi-faceted. it provides support to people who are unemployed or have unemployed family members. those people will be more likely to spend. that will add to the demand in the economy. on the margin, it probably leads people to wait along the. the spells of unemployment may be longer because of unemployment insurance.
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that is a mixed blessing. in some cases, the extra time allows people to find a job with a higher wage instead of taking the first thing they see. there are a lot of interesting ideas out there for the redesign of unemployment insurance. are there ways to create incentives for more training and skills building in a way that unemployment insurance is paid? it would be useful to look at the design and ask whether part of the payments could be used for training or skill-building. >> there are many other proposals for redesign that may be more about stopping the continuation of unemployment insurance than in improving the way it works. that is a real concern in this
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conversation. i gather your point is that it plays a significant, substantial role during times of high unemployment in creating a foundation for demand and the workforce readjusting to the skills of the changing economy. i think i am restating what you just said. i want to make sure. >> it helps with those dimensions. there are situations, i think it has to be said there are some countries where unemployment insurance is so generous that it creates a permanent unemployed class, which we certainly do not want to do. there is a balance you have to strike. those are some considerations. >> turning to home ownership and the housing market, there is the excess supply stemming from foreclosures. depressed housing demand has an impact. you sent a white paper to
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congress laying out in number of ideas -- laying out a number of ideas that we have been discussing and have made less progress on than we had hoped. one of this concept is a proceeding to enable large groups of homes sitting vacant and driving down prices to re- entered the rental market. it seems like helping individual homeowners and when that is not possible getting the homes of a vacancy would be a strong strategy to stop the decline in values and start to restore the housing market. do you want to add any comments or thoughts? >> it is an interesting direction. we provide some analysis in the paper was circulated. we're seeing house prices either flat or falling.
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they are down more than 30% in nominal terms. there is a shortage of rental housing. residents are beginning to rise. to the extent we can move housing from single-family to rental, i think that is positive. they have announced a trial program to see the details worked out. they have announced a program. the related point you alluded to is that there are very heavy costs to leaving homes on occupied for long periods of time. the vandalism and neglect will cause the house values to decline significantly. it will hurt the neighborhood. efforts to maintain continuous occupation by an owner or renter is also a positive. rental programs do that but also the alternatives to foreclosure
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likely to own -- like rent to own, short sales, and other things that maintain continuous habitation of the house. >> senator cornyn. >> thank you for being here. the unemployment rate in america in the fourth quarter of 2012 according to the cbo, the projected it at 8.9% for the fourth quarter of 2012. do you agree with that? >> 2012 or 2013? >> 2012. >> our forecasts are for unemployment to continue to decline moderately. we see growth at close to potential. under normal circumstances, that
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would mean we are creating enough jobs but not making sharp improvements on the unemployment rate. >> i realize the hazards of economic forecasting. when the stimulus was first proposed, christina romer said unemployment would be down around 6% in the first quarter of 2012. obviously, that was not correct. let me ask you some things that might affect the unemployment rate. 8.3% unemployment, what does the federal reserve project the real unemployment rate to be, including people that have given up looking for jobs and people are under-employed? what would that rate the? >> we do not make projections specifically of those. it is important not to just look at the unemployment rate
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reflects only people actively seeking work. there are also a law of people out of the labor force because they do not think they can find work. there are a lot of people working part-time that would like to be working full time but cannot find full-time work. the 8.3% understates the weakness of the labor market in a broad sense. the various measures of unemployment have been improving. the broader measures are definitely higher. >> let me ask you about what is happening in europe. is europe in recession right now? >> the southern countries are under a lot of fiscal pressure. they have been contracting. europe as a whole was growing at a zero rate in the second half of last year.
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parts of europe are in recession. whether the whole eurozone goes into recession remains to be seen. the ecb has predicted a mild recession and has warned this might occur. we think that is a possibility. the severity and links -- len gth remain uncertain. >> that is an important question. europe buys a lot of exports from the united states. that is an important part of our gross domestic product. >> we've already seen a decline in exports to europe. it is about to% of our gdp, -- it is about 2% of our gdp so it is in influence. >> you would have to calculate in real consumer and household
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income -- calculate in real consumer and household income that is down since 1995. >> real household income was basically flat over 2011. households are quite pessimistic about their future income. >> they have seen increased costs of goods, commodity prices, food, fuel. they have seen slight increases in taxes if you combine state, local, and federal tax. they have seen higher health insurance costs. all of those things have a depressing effect on consumer spending and the growth of gdp. >> that is correct. the real income numbers take
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into account all those things except the health care expenses. >> there is well-intentioned government policies, and will mention the 100% depreciation that expires in 2011 for capital investment. is it reasonable to conclude that businesses that could make that kind of capital investment would pay -- take advantage of the 100% depreciation that expires at the end of this year? that would make it less likely would see an increase in capital investment next year because they would have already taken advantage of that policy in 2011. >> we would expect to see some time shifting. that is one more element of the stance thatin fiscal takes place in 2013. >> all of those things lower capital spending, declining
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exports, and spending drive from all levels of government, all of those would have a negative impact on unemployment projections. it would make it tougher for the economy to grow and create jobs rather than easier. >> that is why continue to forecast a moderate recovery as opposed to one that would quickly undo the damage of the recession. >> senator warner is up now. by way of a preview of coming attractions, i will save myself until the end. senator warner? >> it is good to see you again. thank you for your service. i want to echo what senator enzi said.
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i appreciate your support to the notion of going big and recognition that we have to have a comprehensive deficit- reduction plan. i believe we should come found conventional wisdom and not punk this until after the next election cycle. it would be hard to explain to my shareholders if my company were in dire financial straits and i said we have a plan and i will get back to you in the spring of 2013. none of this is self-corrective in the meantime. i like to follow-up on the comments made about your. a number of them have austerity plans. i believe everyone of those countries have also increased revenues along with the cutbacks.
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i have been interested in what is going on in the u.k. do you have any advice or lessons learned if we were to put a plan in place on the phasing in of revenue increases or dramatic cutbacks on spending? are there metrics we should look at on how they should be phased in? >> that is a judgment. the important thing is to recognize this is a long-term problem. it does not all have to be done today. gesturing towards the future without taking concrete steps will not be effective either. the more you can demonstrate the
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will and commitment to sustainability over the longer term, the more flexibility there will be to address near-term concerns related to the recovery of the next two or three years. you need both. i agree with senator sessions that simply promising future action risks an adverse market reaction. the combination is what could be affected. -- the combination is what could be effected. we're looking at a couple more years of recovery. i think there is nothing that stops us from very soon laying out in some detail and with some commitment the longer term plan to address the fiscal problem.
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>> one thing that would be helpful to me is for you to comment on what the benchmarks ought to be. the revenue and spending cuts and when they should be phased in. let me follow up on unemployment. i agree we need to do more things. one interesting point is that it seems like america's rallying cry is that at least we're better than the e.u. that does not exactly stand with give me liberty or give me death. even with our challenges, we have enormous capital coming into our system. we're close to zero or negative rates of return for the capital coming in. one area where i think there is
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bipartisan consensus is that we have been dramatically under estimating were under-investing in our infrastructure. that used to be a competitive advantage. it is turning into a competitive disadvantage. with private foreign capital sitting on the sidelines, and you look at any of the infrastructure bank proposals? -- have you looked at any of the infrastructure bank proposals? we have one that is modeled xm that could get capital that could help with unemployment and long term. >> i have not looked at the infrastructure bank in detail. i am all leery of taking positions. i would make the point that much of the discussion has been
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about total revenue and total spending. that is only the first cut. beyond that, we have to ask ourselves if the tax code is efficient, fair, and simple. are we spending in ways that are effective? we do not want to build useless monuments. we want to make investments in people and infrastructure that are going to pay a return. >> from a business perspective, you are much better off making productive investments. >> thank you for being with us once again and for your time and patience. let me start by echoing the comments of senator grassley. i want to compliment you on the decision you have taken to enhance the transparency of the fed's activities and operations. i know you have put a lot of
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thought into this and advocated this for a long time. i have long shared your view that is better for the economy and everyone involved if the fed does operate with greater transparency. i like the fact you have articulated an inflation target. we could have long and interesting discussions about what that should be. the doctor specified in number is constructive. -- the fact you are specifying a number is constructed. i want to thank you for that. i want to talk about the dual mandate you have to contend with and then these simultaneous objectives of promoting full employment and maintaining price stability. you have said the fed through monetary policy can control inflation over the long run. but it cannot control unemployment over the long run. is that a fair characterization? the thing i am concerned about,
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and i am not asking you to criticize the dual mandate, i know you will live with a lot of the land as it applies to you. but is there a real possibility that these objectives will not be complementary? it seems unlikely the unemployment rate will stay above the optimal full employment level for a number of years. at any time, inflation could take up above the target level you have set. it has recently. it could at any time. if that were to happen, it seems you have tension between the two simultaneous objectives. you described sensibly that you would take a balanced approach to dealing with this. but does that necessarily mean in that scenario where unemployment remains persistently high and the
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inflation rate kicks up above the target, would you have to back of the targeted level or pursue a policy but would tolerate higher inflation than your own target? >> we thought the main benefit of being clear was to provide more information about what our long run objectives were. the situation you are describing, let's be clear, it is hypothetical. it is not the situation. >> at this precise moment, yes. >> let me be clear about one thing. we are not going to seek higher inflation in order to advance unemployment. it is possible that because we cannot control, in the short- run, perfectly, that an inflation -- that inflation and unemployment could have shocks
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that drive away from both of their objective targets. in a very symmetrical way, we would be returning both parts of the mandate to target. we have to take into account the other part of the mandate. it could affect the speed at which we return inflation target. by the same token, if inflation is high, it could return at the same speed. there has to be some interaction between those things. >> that is roughly what i thought you would have to say. let me try a different approach. it seems unlikely to me, anyway, that the fed would pursue such an accommodative monetary policy that it has been pursuing if it were not for the unemployment mandate. i am concerned about some of the unintended consequences of maintaining 0 interest rates,
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negative real interest rates. we have -- after sacrificing their whole life to accumulate savings that no returns, and then the very real possibility that the value of the savings will be eroded. secondly, we are encouraging risk-taking. thirdly, this drives the allocation -- certainly has the potential to drive the allocation of investment. i would argue the risk of creating bubbles. it is hard not to the u.s. treasury market as a bubble right now. lastly, doesn't this enable the excess of deficits that we are running here in part because they are funded at artificially low interest rates? these are some of the concerns that i have with this policy. i wonder if you would comment. >> i do not know i could cover all of them. let me first say that there is a single mandate, central banks
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like the bank of england, ecb, have policies very similar to the fed given that inflation is close to target. i do not think we would be doing radically different things if we had a single mandate at this point in time. we are quite a rare of these costs risk. -- we are quite aware of these costs risk. with respect, it is true that low interest rates reduce returns that sabres get on their savings. i would make the general point that savers do not hold treasury bonds. a cold -- a whole corporate debt and a variety of other securities. in return of those securities, important, on the strength of the economy. we are hoping to return -- to help returns to savers. part of the reason for the
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policy is to move people away from conservative liquid positions and a slightly more into riskier position is that of all investment, lending, and so on that help promote strengthen the economy. we do not want to go too far. we have greatly expanded our ability to monitor the financial system and to watch out for problems and try to address them. i have been in many conversations with insurance companies and so on. on this allocation we are trying to get the economy back to a full employment situation. would you are this far away from full employment, it is not obvious the investments that are being made are the right investments. they may be insufficient, for example, because there is not enough demand for products. i guess the last, i would make -- well, you asked me before about deficit. i understand that concern.
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but i think that the assets of fed policy, independent of all the other factors, on treasury rates is a modest. in any case, rates will rise to eventually. if investors were to lose confidence in u.s. federal fiscal policy, there is nothing the fed could do to prevent those raids from rising. i trust the congress will understand independent of the fed policy we need to strengthen the economy which also helps us. it is extremely important to be looking ahead and making a program of plans for stabilizing the deficit. i would be happy to talk with you some more of the time. >> senator portman. >> thank you, chairman. chairman bernanke, thank you for your insight today. i would like to thank my colleagues on -- on the transparency of the fed. i like to ask your transparency
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on some questions of the economy. talk a little bit about the fact that you see some signs of improvement, especially in manufacturing. those are certainly welcome. but to also cited a number of troubling aspects. the top of the long-term unemployed. you said that more than 70% of the glove and and put for more than six months which is twice and it was in the last recovery. i would add that this recovery is not like the previous recovery. the jobs are not coming back the way they have. 48 months after the recession. at this time, after the 1981 recession, which was the most deepest recession in recent times, we had 6 million jobs that had been created as opposed to 5 million. even the jobless recovery of 2001, we were up at least for in a few thousand jobs. something is going on that is very different. i think the labor rate is a key issue. you did not talk about that in
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death, but my understanding is that -- in depth,, but my understanding is that it makes it about 66% participation compared to 64%. and a plum would be over 10%. i think we have a more serious structural problem then perhaps just another business cycle. if you agree with me on that, then i would love to hear what to think about what we should do in terms of structural changes. i would add to that, by the way, the fiscal side. it was said that we are an increased probability to a fiscal crisis as i read your testimony. the possibility as what happened in southern europe, a sudden spike in interest rates. my question to you is, on the tax had come on the regulatory side, on the health care side, on the energy side come off as you talked about briefly in the area of health care costs, don't
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we need a reset of the economy and a more aggressive structural change to the economy? and if so, if you agree with that, along what lines would you suggest? >> first of all, i think there is still a substantial cyclical capone in what is happening. our estimate of longer unemployment is still far below 8.3%, of course. it remains important to try to continue to support the recovery. there are a number of forces that are slowing the recovery. i talked about housing and financial markets and credit markets in my testimony. all of that being said, good policy is good policy any time. there are lots of things that the u.s. would benefit from structural reforms. i talked freely about the tax code. and if you are very interested
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in budgeting and tax cut issues. that be very instructive. we have very important needs on education and work force skills. healthcare is a major, major issue. both because of the federal fiscal situation. it is the major force driving the long run deficits, but also because the high costs are bad for the efficiency and living standards of the economy in general. those are all areas that, when you and i were college in the previous administration, we talk about those issues. we worked on trade. which is also an area where i think progress could still be made. all of these structural reforms should not be put on the shelves just because we are still recovering from a deep recession. >> i would suggest, back in
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those days, the tiger eye was the director and we at 4.5% unemployment. we had a debt that was -- gdp. things are going pretty well. the fact is, we need more of a sense of urgency. we need one credibility and respect on the monetary side, but also on the fiscal side. i'd in that sense of urgency is needed. i believe we're looking at something different this time. i think if we do not make these serious changes, we will be in trouble. you mentioned tax reform. in the last two decades, the developed countries and the world have changed their tax code to the encourage investment and development. everyone has done it except us. we continue to fall behind as a result, in my view. this i think to be played out in
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these other areas we talked about, certainly on the regulatory side. >> thank you for your testimony today. i look forward to your continued advice on the structural changes in the economy to truly deal with the second part of your mandate and to get jobs back on track. >> thank you, senator. >> center, you are up. >> thank you, mr. chairman. senator -- chairman vernon he got thank you for your work. -- senator bernanke, thank you for your work. -- chairman and bernanke, thank you for work. you are lying if -- if you are relying on entitlements like medicare and then looking farther out, such as security in 2036, what is it a anything but the fiscal state of this
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country and your responsibility as the chairman of the reserve that keeps you up at night? >> well, i have tried to stay away from individual programs and taxes. i feel it is within my remit to talk to congress about the overall fiscal situation. i think it is very clear. a very clear presentation was made that on current reasonable expectations about policy, the u.s. federal deficit will become unsustainable within 15 or 20 years at the most. possibly, some of those of axle be brought forth by markets, for example. -- some of those at fax -- effects may be brought forth by markets, for example. we're not as concerned about our children 20 years from now. this could happen much sooner if
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markets began to lose confidence. -- lose confidence in our nation's ability to stabilize. >> do you believe that here, in the congress, we need a greater urgency in addressing these issues? >> certainly, you do. in fairness to the hard-working people here, i would say there is still a lot of -- there is a lack of clarity to some extent among the general public. i think people have conflicting views about what they want. everyone wants a lower deficit, but nobody wants to lose their own program or their own tax cuts. this, i understand. but absalom, we would all benefit from action to -- but absolutely, we would all benefit from action to plan. >> does that need to happen
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immediately in the next year or two? >> as soon as possible. >> thank you. i wanted to follow-up on questions that you were asked about some of the risks that you see with our monetary policy right now. two days ago charles are schwab wrote a piece in the "wall street journal" and i do not of you had a chance to look at that piece. one of the issues was the issue of the risk of keeping interest rates low with respect to savers. he also noted that there is a concern that he described it this way -- we have all seen a destructive run of capital out of europe and to save u.s. assets such as treasury bonds to avert a world wide aversion to risk. a record low. consumers to start investing in growth, boom.
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in short, he says, the fed's actions are hurting the willingness of banks to loan to anyone whose credit is so strong they do not need to loan. can you respond to that? >> i disagree with that completely. i think, first of all, one of the goals of our asset purchase program is to take say treasuries out of circulation and push investors into situations that are appropriately risky. that is, making loans. bind corporate debt. taking actions, hiring, investing. beyond a certain point, you do not want to create excessive risk. the going to visit to assure people are down to a slightly riskier position is positive for the economy. when banks and others are making decisions about whether to lender not, the have to ask what
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is the alternative. the alternative is very low yielding treasury securities. making only 2% on the treasury is a very low bar for making a 10 year loan to a new business. that encourages lending rather than discourages lending. so, i think that our policy is strengthening the economy. that produces uncertainty. >> thank you. i know that my time is up. i know that i would also see the risk in terms of well in the boom to our interest rates. thank you. >> next. >> thank you, mr. chairman. thank you for calling the hearing to talk about monetary and fiscal policy, which impacts our economy. the economy is on the forefront of the minds of the american people. i want to thank you for being with us today and talk about our
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views on that. i'm sure you have been asked in some form today, but i wanted to get at this level of exposure of the u.s. banking system has to eurozone bings. -- banks. my understanding is that exposure has come down but there is an exposure that remains. if the eurozone were to deteriorate, we could see the crisis on par with those sought in the 2008, 2009 in this country. i wonder if the federal reserve keeps records of total exposure that our u.s. banks have to european banking system. >> as supervisors, we asked banks to provide information to help us analyze their exposures. they are much reduced.
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the banks still are exposed, of course, to the european counterparts. they also reduce that exposure to some extent. i like to point out that we also looked at the quality of the hedges. a credit default swaps is no different than a bank or a party who wrote it. we think banks have made progress in protecting themselves against problems in european sovereign or greek debt. i would agree with your final observation which is if there is a substantial crisis or similar problem in europe, because there are some a challenge -- summit channels of the financial system, i think our banks and our whole financial system would still be significantly affected. >> but you do have a way of calculating or quantifying that exposure and you are confident
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that risk is being produced by banks in this country to a level, i guess you could say is sufficient. i am not sure. >> it is reduced, of course, difficult to ask banks to completely eliminate their exposure to a major part of the world economy, which is europe. but, yes, there has been progress made. again, i do not want this to be interpreted as a blanket statement. i think if there were a major problem in europe, the risk aversion, the volatility, all those things would have a powerful impact on our financial system. >> just sort of broadly speaking, is the united states currently in a fiscal position to withstand another economic crisis? >> well, ironically, that is an
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interesting question. ironically, u.s. dollar strength strengthened and u.s. interest rates went down during the worst parts of the crisis because the u.s. is viewed as a safe-haven. that is where a lot of investors want to go when the rest of the world is uncertain. in that respect, that actually helps us. on the other hand, if we were to have a significant further downturn in the economy that brought down tax revenues, it would certainly put stress on an already stressed situation. >> one of the responsibilities of the federal reserve board is to have regular contact with the president's council of economic advisers and other key economic officials. as chairman, you also meet from time to time with the president. in those discussions and your contact with the president and his advisers, have you
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underscored the necessity of entitlement reform in order to get the country back on a sustainable, fiscal path? >> i think that issue is well recognized. i certainly talk about it, yes. >> one of the concerns of many of us have had is that there has not been, in the president's budget submissions, at least, we will get another one this week, if he focuses on those issues. a willingness to confront what we think are very serious fiscal challenges with regards to these unsustainable -- sort of, the big three, if you will -- medicare, medicaid, social security. intimate reform is something we need to be focused on. >> i think, inevitably, that will be brought -- that will be part of broad fiscal reform. it does not mean the system has to change tomorrow. after all, the people who are already receiving those
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benefits deserve, you know, not to be shocked by radical changes in their benefits. i think most people agree with that. once we take action now to pose longer-term changes, i think it is interesting that the commission that look at social security in the early 1980's and propose a face and of the retirement age, that phase in is still going on today 30 years later. doing things well in advance makes it politically and economically much easier to adjust to. >> my time expired. thank you, chairman. >> best for the last, the ranking member of senator sessions. >> thank you, mr. chairman for your patience and sharing with us your views on the economy. i would just add that there are dangers out there, in my view. we cannot always predict them, but they are. i believe we are running a debt
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right now that it could cause problems that we cannot foresee right now. charles schwab, who is not an insignificant figure in american economics, he is not totally happy with the fed. i would say, if we asked you in 2006 if you agreed, he probably would have disagreed with that. but sometime dark prognostications, unfortunately, come true. i am worried about our future from that point of view. you have talked about it, though, very directly and in your remarks today, the dangers, particularly over a period of years with our entitlement. do you have any concerns that the size of our debt already presents a threat to our
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economy through some sort of financial crisis that was predicted in this room and happened within two years if we cannot make a major change in our financial path? and, as to the possibility that the current debt path we're on now, a level of economic growth this country has. so, if you have concerns with regard to this, would you share with us how something like this might play out and could be pulling out that would be damaging to our economy and/or a threat of economic crisis? >> senator, you just pointed out that is very hard to forecast and then you asked me to forecast. >> he basically said the cannot foresee any danger in the next few years. >> i did not say that. >> what would you say the
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dangers are in the next few years? >> my sense, just my sense of markets, is that they are not reacting to the current level of debt. they are attentive to the process. in other words, if you think about the downgrade of s&p to the u.s. debt in the summer, what they cited was what they felt was the inability of congress to actively work together to achieve meaningful reductions. so, my sense is, and of course, i do not know for sure, but my sense is that a strong demonstration by congress and the administration that they understand these issues and that they have a plan for attacking them, i suspect would go a long way to maintaining confidence in the bond market. but, that is just my judgment. >> it is an uncertain world.
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do you agree with the idea that ok developed in their boat based on empirical data, not their views, that when a nation's debt received 90% gdp and could pull down growth from 1% to 2%, so if it would be 3% growth it would come in at 2% or lower, do you think that is a sincere -- you think there's a sound theory, or to reject that? >> had nothing that is a sound number. but did say that as debt is high, particularly with unemployment, we will have to raise interest rates and crowd out investment. it is certainly a negative. in giving those in their book. i think thousand some separate work that they did. in any case, i do not think there is a magic number. certainly, the higher the debt to gdp ratio -- >> what would you consider the
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debt to gdp ratio. what is the value today? >> the federal debt, if you add state and local obligations, it might be closer to 90%. how you deal with unfunded liabilities in the future. >> you're talking about social security and medicare? >> that would put to over 100%. there are different ways of looking at it. certainly, the main concern i have, again, is not the level given the moment of time, but just the fact that we are on a path that is not going to be sustainable. it will continue to move into the stratosphere and that has to be addressed before it happens. >> mr. brogan off and a coffee shop in davos last week, the
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interviewer said, when a state's debt exceeds 90% gdp, it will produce economic potential for the country and the reporter said, i suggest that if the united states is still comfortably short of that level, but i am swiftly corrected. if you count the federal debts and at in unfunded debts of social security systems, and he thinks america's debt level is well over one had to china% -- 120% of gdp. the paper that he wrote was indeed based on the study of the financial crises in at nations ever performed. that is why i have got a good bit of interest. thank you for sharing with us. i do believe you are correct to
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advise us that we should move forward with reform on all fronts sooner rather than later. we could, perhaps, disagree about exactly when we ought to start these reductions and spending. but personally, i would believe that we should not go one day with inefficient, wasteful government spending. if every bit of that should be eliminated sooner rather than later. a healthy, lean, protective federal government would be good for the economy also. thank you, chairman bernanke. thank you mr. chairman for your courtesy. i hope our permanent chairman feels the same. >> we wish him well, beleaguered with an infection today. mr. chairman, i would like to review a discussion we had in
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our earlier meeting. i think it is helpful to put the spotlight on the issue. it is the question of health care, which is the most significant part of the discussion about so-called entitlements. i begin with the observation that we have very significant medicare liabilities. we have private health insurance which costs are going up at least as fast if not faster -- it is hard to judge because they take away benefits to offset costs. it appears faster, in my view. you have the reductions administration and defense budget, both suffering from increase in health-care costs. secretary gates said that health care costs are eating my budget alive, talking about the defense budget.
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we burn 18% of our gross domestic product on health care costs. our nearest, most inefficient industrialized competitors at about 12%. it puts us 50% worse than the least efficient country in the world. very responsible views about what the savings are per year. $1 trillion a year, which is a big deal for the economy. sitting on this budget committee, i have the recurring frustration that there is a tendency to overlook the solution to that health care problem, which is actually very well under way in the private sector already in places. which is to, to " the ranking
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member, to turn our health-care system from inefficient and wasteful to something that is helping, lean, and productive. because of the cultural transformation of turning a few corners, because it requires an element of experimentation and innovation, it is not something that lends itself to scoring. scoring is always the coin of the realm in these discussions. what i urge you in our off the record meeting is that as you are discussing this problem, please do not overlook that element of a potential solution which would not only help with medicare and medicaid costs in the future, but help with health care costs across the board which are burdening our families. it is a huge burden on the entire american economy. that is my worry. because you cannot score its.
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because it is a reform of a systemic nature, we tend not to talk about it. they came here, they agreed. critical, they did not talk about a because you cannot score it. you are right, this is critically important. you are right, but we cannot score is. please to not let this be a place in which this message gets lost is you cannot score it. chairman. >> well, senator, i actually spoke about health-care costs as a major factor in my testimony today. i agree with everything you said. we have a system which is very excellent in some dimensions. it is less excellent than others. finding ways to control those costs is absolutely essential, not as for the federal budget, although it is critical, but as you say, for the broad economy. we have had a number of
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meetings. we have brought in economist to talk about what the approaches are. again, simple approaches. i guess one principle which might set the stage for discussion, one way of looking at our system today is we have a fee-for-service system and a third party pay. nobody who is making the economic decision about the effectiveness of care. that is an essential element of an ineffective system. there are many ways to address that. that is one of the issues. >> thank you. i appreciate your coming in today. and we have a hard stop at noon. you are now two minutes over. >> i would just like to, if we could show on the screen some of the numbers i propose. this goes back two administrations.
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the numbers indicate that even though unemployment rate looks like it is moving down, and i think maybe that number on the right has moved up a bit, we are still having fewer people working today than in 2001. that is pretty significant since the population and the working age has increased. i think all this the to ask ourselves how we have more growth and productivity and job creation. would you agree? >> i could not agree more. >> the other charges of labor participation rates, which is looking at the percentage of people in the working age who are working. that is a steady downward trend. all of us need to be thinking about how to do that. i think one factor we talked about is a debt.
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it's maybe have crowding out. if we can think of ways to increase productivity without increasing our debt, would you not agree that would be important and if these trends continue, it would indicate that the united states is weakening as a nation economically? >> some of these trends are demographically related, one way or the other. if you increase opportunity, more people will want to come out of being out of the labor force and come back into employment. >> the unemployment rate, based on the number of people who are actually implying, but the number of people who dropped out is significant. that number right there is based on demographic and age factors. it says -- it should be within the working age. we have fewer working.
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i think both parties to focus on that. it is one reason the middle class is feeling a lot of pain right now. >> let's reflect on the fact that although there is a long way to go, we've gone from an economy that was losing over 700,000 jobs a month when the administration took office to and has gained nearly 0.2 5 million in the last report. there are a lot of things to do -- 0.25 million in the last report. there are a lot of things to do. >> how many are at it? the know offhand the number of people who are added entity that at least a number of jobs, you are falling behind? >> normally, the groot to point -- 2% to 2.5%.
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just to keep it stable. in terms of the employment rate. >> so at least to a 40,000. >> we are about that. >> thank you very much, chairman. we appreciate your testimony. >> thank you. >> on "newsmakers," senator jeff bingaman. he also talks a lot a clean energy standard and negotiations to advance green energy credits using the payroll tax-cut bill.
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"newsmakers" today at 6:00 p.m. on c-span. >> here is that wonderful moment when the senator revealed his nostalgia for the states' rights segregation in the south. take a look. >> when he ran for president, we voted for him. we are proud of him. >> talking points -- the immediate ecosystem is such a different world today than it was 10 years ago. i think things like that happen all the time now. i know there are certainly many big stories that were had over the last decade. now we have an editorial staff of 20 people. we are breaking stories right and left. it has almost become
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commonplace. it is not nearly as surprising today as it was back then. >> more about josh marshall tonight at 8:00 p.m. on c-span's "q&a." >> a hearing focused on cyber security threats to the u.s. and the role of private sector and the federal government. they heard from several internet security firms. this is two hours and 15 minutes. >> i called to order the subcommittee on communications and technology. i want to welcome our members and witnesses. that in october, the house
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republican cybersecurity task force recommended the committees of restriction review cybersecurity issues. this hearing continues our committee's review of cyber security issues with an examination of threats to communications networks and the responses of the private sector. threats to communications networks have come a long way in a very short time, and they are very, very real and serious. before coming to congress, i spent about 22 years as a radio broadcaster, and as a small businessman, had to worry about security in our communications network 20 years ago, it was relatively straightforward. you had to have a fence around the tower and you could not let people get near the transmitter. while physical security remains important, cybersecurity has become a pressing concern. now small-business confronts a
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dizzying array of threats on line. these threats are serious -- it can crash a website or launch a barrage of attacks on the network. those are serious consequences for the small businesses that are the heart of creating jobs in this economy. and our small business, 10 years ago or so when we did create a computer network and put everything up on digital audio, our main server was attacked and taken over and it suddenly started running slower and slower. eventually we determined it had been overtaken. every month we learn more about the cyber threats. what we have learned thus far is of great concern. i am concerned that our
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communications networks are under siege. i am worried that the devices consumer issues are vulnerable and i am concerned there process for looking at communications supply chain issues lacks coordination. i am also concerned that our cyber defenses are not keeping pace with our cyber threats. in this hearing, we are lucky to have the voices of by private sector witnesses to guide us through the complex issues of cyber security. i am hoping you will tell me that cyberspace is secure and we can all rest easy at night. unfortunately, i have read your testimony and it is not so. american businesses are losing dollars, jobs, intellectual property, and much, much more because of cyber crime, and our national security is potentially a risk. the private-sector owns most of
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the critical infrastructure, the wires, servers, the towers that make up our communications networks. they are on the front lines of cyber security. i want to know what cyber security services are being offered to consumers, what protections are being deployed in our communications networks, what affirmative steps are being taken to combat cyber crime. i expect to hear what you think the appropriate federal role is. our federal laws and regulations -- are they helping or interfering with information sharing? our federal regulations appropriate, and if so, how? should the federal government be providing incentives for internet service providers and other members of the private sector to invest and innovate in the cybersecurity arena?
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how should our country's fiscal state shape our discussion of the federal role? these questions and others will form the basis for deciding what cybersecurity legislation, if any, is needed in the near term, and how we can best secure cyberspace in the long run. i want to thank our panelists for being here today to help inform this important subcommittee on what we should do and how we can be better informed in doing our job. with that i would recognize the gentle lady from california, the ranking member of the subcommittee. >> thank you for convening this important hearing, and i want to welcome the witnesses. i am pleased that juniper networks and mcafee are here to talk to us about tackling the challenges of cybersecurity this morning. we all recognize the serious
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threat to our nation's communications networks. since 2006, the number of federal cybersecurity incidents reported to the department of homeland security has increased by 659%. that is a whopping number. the economic impact of these incidences is equally significant. a recent study estimated that the median annualized cost of cyber crime to a victim organization is $5.90 million per year, an increase of 56% from 2010. the more we rely on the internet to conduct our business, the moral vulnerabilities we create for hackers to exploit. having served as a member of the house intelligence committee for eight years, i am very well
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aware of the threat, not just from criminal hackers but also, obviously, from other countries. talking about the problem is not enough. we need to act, and that requires the help of both the private sector and federal government. the private sector represents 95% of this, the federal government the other 5%. when the first steps to tackling is growing threat is education and training, whether at home or in the workplace. every american should understand what they can do to protect themselves against a cyber attack. route information sharing is also a key aspect of our nation's response to cybersecurity. if we are going to ask industries to report cybersecurity incidents to the government, then we need to establish a clear process to do so. i am pleased to support our colleagues efforts. it is one of three or four bills in the house and three or four in the senate as well. it is important to recognize that timely alerts to consumers
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and businesses can be the difference between an isolated cybersecurity incident and one that impact millions of users. of voluntary isp code of conduct currently being developed by the sec is one of the proposed ways to alert consumers when a malware infection is discovered. today's hearing is an important opportunity for us to better understand our rule in cybersecurity including what role should be played in protecting our nation's communication networks, and how the private sector and other federal agencies should interact with them. so thank you to all of the witnesses, those that come from silicon valley to instruct us, and what remaining time i have, i would like to yield to mr. markey. >> last week robert moore testified that cyber threats
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will soon surpass terrorism as the number-one threat facing the united states. we know from the department of homeland security that there have already been threats to the utility sector. we know that russia and china have rolled over electricity grid to find vulnerabilities. our economy hinges on of our reliable flow of power with losses that going to the billions of dollars with every major blackout. our national security also depends on it. 99% of electricity used to power are in military comes from the commercially operated grid. last september i ask the federal regulatory commission to name the number one threat to electricity reliability. all five commissioners agreed cyber threats or the number one threat to the grid. 2009, the full committee passed the grid act.
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it gave the authority to quickly issue grid security if threats have not been adequately addressed by the industry. it was killed in the senate. all five commissioners also agreed that given this authority would increase america's ability to secure our electric grid. with cyber threat growing by the day, threatening our security and our economy, it is compare to that this committee passed the grant act so we can move it forward could dig past the grid act. we should listen to the fbi director and to the warnings coming from russia and china and pass the grid act soon. i yield back. >> we are now going to recognize mr. barton. before i do that, i just want to say how important it is to
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have these members on this. all of that is most helpful as we tackle both of these issues. i now recognize the gentleman from texas, mr. barton. >> i thought mr. market was going to say the experts said the biggest threat was the epa, but he went a different way with that. back in 2006, subcommittee chairman upton held a hearing on this very same issue, and as full committee chairman, he and i sent a letter to the gao asking them to take a look at this issue. the response we received then is the response we are
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receiving today upheld, that it is quite possible we could have a major attack, attack in this country that would dramatically affect our country. according to the norton cyber crime report this last year, cyber crime is a $388 billion industry with 431 million adults experiencing at least one cyber crime in the last year. in another study, research shows that the median annualized cost of cyber crime for companies is over $6 million a year. these are real numbers, real statistics for the year 2011. as we've used the internet more and more everyday, it is absolutely imperative that we
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really take this seriously. as you pointed out, it is good to have the chairman of the select committee on intelligence on this subcommittee, because he has access to information that could be useful if and when we decide to legislate. so thank you, mr. chairman, for holding the hearing. as you know, there is an epa hearing downtown in the energy subcommittee, so i will be shuttling back and forth. >> if you don't mind yielding to mr. terry, and ms. blackburn will comment. >> this is an extremely important hearing and if we have to elevate the level of discussion and potential solutions. there is only one silver bullet that exists to prevent cyber crime. that is to complete disconnect your computer from any network.
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use it as a paperweight, maybe just play solitaire. that is it. if you are going to engage in any level of commerce using the internet, you are at risk. the only thing we can do is try to minimize it. there is no silver bullet. why these folks are here today is for us to understand what tools may be available. in the cyber task force, one of the things we concluded is that the vast majority of everyday hackings can maybe not be prevented, but just go along with basic security features offered by private sector today or the networks. but we have to have people to actually purchase those or use those tools. there was one instance in omaha with the entity that controls our facility that never thought
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it was important to have that kind of security. they were hacked, and all the information was stolen. the next level is where it gets dicey. how do you protect people? how do they protect their data? we cannot engage in setting the standards because, frankly, we set the standards and before the ink is dry on the bill, the standards have changed. so you are here to help us understand what solutions may be available to minimize and help secure our infrastructure. i want to thank you all for being here today. >> thank you very much, and in the short time we have, i cannot tell you more important issue. a lot of things can keep you up, and this is one of the main
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ones. 8% of the attacks that happen every day can be prevented by the operator. it is those other 20% that are the devil in the details. between criminal attacks, economic espionage, disruption, or hacking, as we would call it, we have a very real and present danger when it comes to cyber threats to our network. nobody is more integrated than the united states, and therefore we are more at risk than other countries. i do believe it is unprecedented in history that such a massive and sustained intelligence ever by a government to blatantly still commercial data and intellectual property be used against the united states is well underway. we don't talk about it a lot, because companies are reluctant to talk about it. the real number we think is somewhere between 300 billion and one trillion dollars in lost intellectual property. the most concern or non nation
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states that are developing cyber capability that can threaten the united states. we did a seminar at stanford university on this very issue. i think it was well received. i look forward to hearing from the witnesses and i appreciate you being here so we can get to that next step and actually do something that helps us have a fighting chance against these cyber threats. >> thank you for holding today's hearing. i would also like to welcome our witnesses here today and i look forward to your testimony. there is no doubt that cyber attacks are real and continue to pose significant threats to
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several aspects of our economy. communications networks for one of many areas that our nation must protect and ensure safety and soundness, particularly as we consider deploying an advanced nationwide broadband network for public safety. this new network will share many of the same cyber concerns as any other network. this is something we have to take seriously and must protect. moreover, our economy continues to experience ever evolving ingenuity and innovation in the american technology industry. one of those technologies that will continue to play a prominent role in the economy, both in the public and private sectors, is cloud computing. we also see consumer cloud applications like the icloud. one of those key issues is the challenge of cybersecurity relating to the cloud. the challenge is to find a
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critical balance between american innovation and growth call combating cyber attacks. for the most part, the private sector will need to be up to the challenge in managing itself and that the networks from potential cyber attacks. that said, i do believe that some balance may be appropriate where the government must work together in partnership with the private sector on enhancing our nation's cybersecurity preparedness. simply put, one cannot do it without the other. small businesses, many of whom rely on the broadband economy, are also very susceptible to cyber attacks. in many instances, small businesses cannot fend off such attacks because they do not have a plan, or lack the resources. such an attack would be very costly to their businesses. during this economic recovery, the last thing small business owners in my district and
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across the country need to worry about is a cyber attack that would hinder their business. i am pleased that the fcc recently launched a public- private partnership which is an online tool that will allow small businesses to create customized cybersecurity plans. it is important that we continue to educate small businesses and the public in general it is important that we continue to educate small businesses and the public in general about risks that cybersecurity poses to small businesses, the government, and to our economy as a whole. i also believe a strong private-public partnership is critical to protecting against cyber attacks. it is my hope that that partnership continues to foster care moving forward. i look forward to hearing from the witnesses today and hope they will have future hearings in the subcommittee so we can also hear more about the
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government of the effort to combat cyber attacks. again i think the chairman for holding today's hearings and i am happy to yield to anyone on our side. i yield back the balance of my time. >> thank you for your testimony. we will now proceed to the witnesses. we have a very distinguished panel and we thank you again for being here today to share the informational having your testimony. we are going to start with mr. bill connor, the president and chief executive officer of entrust. thank you free testimony, and we look forward to your comments. >> good morning. it is a pleasure and honor to spend the morning here with you. i would like to focus my early comments on the arms race, on one particular sector of security.
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it is called man in the browser. that vector of security is probably -- it has been around for awhile. both for the country state and in organized crime state. specifically, it is known as zeus. it is commonly now combined with -- zeus was the original man in the browser software. it started out in russia and ukraine. it went under its own merger and acquisition by its lead competitor in the underground world. their tools and technology were next generation. they merged in the fall of 2010
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behind-the-scenes, as law enforcement started to attack its. in february of last year, that new code is out on the market. you can bite with 24/7 support. no longer do you have to be intelligent to write the support. you buy it, pay for the support, and that will help you design your attack back on which banks, what you want to do. it is very complicated. you cannot find it with the traditional software that you have on your desktop, whether it is and anti-virus or the operating system is looking for it. it is "software that is targeted at small and medium business because it is targeted for money." what it basically does is target small and medium business that
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probably does not have the technology or banking understanding with its supplier to understand how to deal with it. how does it work? i am a treasurer at a small business. i go when online to my financial institution. i say i want to move, say, $10,000 to a supplier. i have an agreement with my local bank to have online bill pay. i type that in, the bank sees that, but before the bank sees it, the software wakes up in the browser and changes the payee's from one supplier to maybe six mules. it changes the dollar amount from $10,000 to $100,000. what the bank sees is $10,000 going to six people. it is on your ip address and your network and your location. i am going to send it back because i want a one time pass code.
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it sends it back to the comptroller of your business and says please confirm by putting your pass code in that is going to expire in 30 seconds that you authorize this transaction. that software wakes back up, converts that $100,000 back to $10,000, six players back to one. you type in your pass code, hit enter to send it back, and guess what? that $100,000 is now gone from the bank. you lose it, the bank loses it, and it is fed back into organized crime are around the world. unlike the personal side where i am protected by fdic, as a small or medium business, you are protected by nothing. if you look around this wonderful country of ours, there is no clear case law. the bank said i did nothing. we have had cases overturned that even though a business had
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only done it for transactions in the last year, and 20 transactions happen in six hours, totaling $2 million, when there line was only 500,000, that is what has happened. the good thing is the technology exists to deal with that today. the banks are not doing it and small businesses do not know what to do. our belief is very straightforward. much like quality, we need a lexicon. we need to do it over time. that is why education is critical. the second thing you must do is have public-private partnership. i can tell you the legislative walls around this do not work for anybody. i think you have to break public-private at different levels, from intelligence to the people like me that try to
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secure the u.s. government and others, to energy grids where the department of energy works with those types of organizations. finally, we must take a unified effort in public and private to defend this, because it is and arms race. >> thank you for your excellent testimony. i think we have to recess so we can go do with our own accounts and we will be back in about an hour. we look forward to getting into questions with you and exploring it further. we are now going to mr. robert dix of the juniper networks. we are delighted to have you here. thank you for coming this distance to share your wisdom with us. please proceed. >> good morning. thank you very much for inviting me to testify about cyber security. juniper networks is a publicly
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held, a private corporation headquartered in california with offices and operations around the world. information technology and communications networks or embedded in all manner of the nation's infrastructure including power plants, water filtration systems, financial and transportation networks, just to name a few. while risk assessments are being conducted, it delegates that networks are resilience. it is important to acknowledge that the risk continues to grow and change our efforts must be sustained and agile. in recognition of this reality, the private sector is working every day to protect against cyber threats. let me share a few examples. in 2007, a group of private companies can together to address the issue of software assurance and improving the
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integrity of software and hardware products. one group has a series of written deliverables available to the industry at large. in 2008, a group of private sector companies came together to address the need for global, instant response by forming the internet consortium for the advancement of security on the internet. participating companies routinely share information in an effort to mitigate abnormal network activity globally because the cost is greater than any one company. across the 18 sectors, we have organizations working on the operational issues. we have sector coordinating council's that were derived as a result of the national infrastructure protection plan in 2006.
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one council represents all 18 critical infrastructure sectors and working under a framework to advance critical infrastructure protection and cyber security. we are working with the administration on the implementation of national preparedness regarding an all hazards approach to critical infrastructure protection and cybersecurity. the number of users connecting to the internet will continue to grow. traffic is expected to grow to four billion users in 2013. the explosion in the use of smart phones and tablets and the growth of social media is rapidly changing the workplace and how we communicate. an average of 10,000 tweets in the last few minutes of the super bowl on sunday. this is the essence of
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technology. it enables us to do what we never could have imagined. that includes those with nefarious motives. the convenience of technology has changed the sharing of personal financial information. it is only reasonable to expect that the conversation must included discussion about economics. there are two sides of this going. if we focus only on technology development, we could miss the opportunity to examine the challenges and solutions. the market is developing an innovation and an unprecedented pace in history. the evidence would suggest that the adoption of available solutions has not kept pace. many low-cost and low-cost solutions are available to improve any users protection profile. there are many things we can do together. it is reported by reliable
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sources that a% of the vulnerabilities are the result poor or no cyber hygiene. we can raise the bar of protection, it makes it more difficult and costly for the bad guys to do harm. when our nation was confronted a couple of years ago with the threat of the h1n1 virus, we mobilized as a nation to warn and buys:how to prevent themselves from the risk of infection. we have the opportunity to use that same model to educate citizens, small business, students, nonprofits, and other stakeholders on how to prevent themselves from infection in cyberspace. we must move beyond just thinking about the challenges of today to thinking about the risk profile of tomorrow. today's cyber attacks are more complex and difficult to detect and can target classes and even specific users, gaining access to valuable data and causing
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significant harm. working together, the united states will lead the effort protection of critical infrastructure. on behalf of my colleagues and employees of juniper networks, i thank you for the opportunity to testify before you this morning. the threat is real and the time for action is now. the american people are counting on us to get this right. we will continue exploring in the collaborative relationship on this important issue. >> thank you very much for sharing of commons with us. we now go to dr. james a. lewis from the center for strategic and international studies.
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thank you for being with us. we look forward to your testimony as well. >> i would like to thank the committee for this opportunity to testify. one thing that military and intelligence experts would agree on is the cybersecurity problem is getting worse, not better. there is straight forward evidence that what we are doing now is not working. most experts believe we will not change your laws and policies until there is a crisis. i hope they are wrong. we all recognize the growing dependence of our economy on cyberspace and the risk this creates. there was testimony about how iran is losing its reluctance to attack the american homeland. the fbi director testified that the threat we face now come from terrorism and the beer is the bigger threat will come from cyber attacks. the ability to launch damaging attacks is spreading from a few advanced nations to many countries and many hostile groups.
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there is disagreement among when hackers will disrupt critical services in the united states, but most estimates put it at some time in the next couple of years. cyber crime an espionage are rampant now, costing american jobs and damaging american economic competitiveness and national security. this morning i was trying to think what i could say that would be a little different, and i remember that i attended some of the first meetings in the clinton administration on commercializing the internet. back then, we thought it would be used for e-commerce like ebay and amazon. we did not expect a global network that would become the premier vehicle for espionage and the primary vehicle for attack. we thought if we freed up encryption, companies and people would voluntarily secure the networks. i was wrong. we made the same mistakes in our approach to critical
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infrastructure protection. there are three big errors. the incentives for cybersecurity vary from company to company and sector to sector and usually they are inefficient. there are legal obstacles that limit the ability of governments and companies to cooperate and share information. we need a coordinated defense, not a grab bag of individual actions. finally, we did not expect to face world-class opponents, as you heard from some of the earlier testimony. even midrange opponents with access to world class tools. we over estimated incentives and underestimated threats and legal obstacles. i would like to point out that congressman rogers bill would be useful if we could get it
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passed in removing some of the legal obstacles that hamper our ability to provide an adequate cyber offense. syria's defense requires coordination in mandatory action. the big telecom companies are good at securing themselves and don't need more regulation, but the other sectors are in bad shape. some say regulation is burdensome, but if we do not hold infrastructure could mandatory standards, we guarantee a successful attack. nor does regulation damage innovation. and nonregulated internet is not a substitute for business friendly environment that innovation really needs. partnership and cooperation must become more than an exchange of slogans. australia has a good model where the government encouraged internet service providers to develop a code of conduct to deal with malware that appears to be working. we are considering similar options. there is a fundamental will set addressing the framework of the internet.
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we identify problems with it 20 years ago. we identified fix is for 12 years ago. we have not implemented these fixes. the investor would be really crucial. there are many opportunities to improve cybersecurity, but taking advantage of them will require a new approach. everyone wants to make things better. we all realize the scope of the problem. hearings like this provide an opportunity to find that new approach that will truly serve national security. i thank the committee for the opportunity and look forward to your questions. >> we appreciate your testimony and will have a few questions on the australian model. we will go now to mr. larry clinton, ceo of internet security alliance.
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thank you for being here today. we look forward to your comments. >> good morning. there has been dramatic change in that of cyber threat picture in the last 18-24 months. the main concern is not hackers or kids in basements. cyber attacks have grown increasingly sophisticated, using what is known as the advanced persistent threat. these hackers are pros. they are expert attackers. they target a system and almost invariably compromise or breach it. unfortunately, conventional information security defenses don't work against them. they are successfully evading best practices. it does not mean we have no defense. it means we need to modernize our notion of what constitutes
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cyber threats. traditional approaches will not solve the problem because they will be largely reactive and not stay ahead of the changing threat nature. bad regulation could be counterproductive, leading companies to expand their limited resources. fundamental to stopping the advanced threat is to understand that our biggest problems are not technological, they are economic. independent research has shown the biggest barrier to combating the cyber threat is cost. president obama's cyberspace review said that many solutions that would enhance our security already exist in the marketplace but are not being used because of cost and complexity. last week, bloomberg released a study that found that to maintaining an acceptable level of security would require a 91% increase in spending.
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the private sector has been extremely responsive to combatant cyber threat. average spending in the telecommunications industry is $67 million a year. despite the fact that our current infrastructure is under constant attack, we have never had an instance of serious breakdown similar to what we have seen in the environmental arena. this success is due in part to the flexibility generated by the current system that relies on voluntary partnerships where the industry can manage the systems best and use their intimate knowledge to respond to emerging threats in a way that protect the system, rather than being driven by a preset government directive. there is still a great deal that congress can do to improve cybersecurity right now. first of all, we need to get the government of the house in order. systemic threat sneeze to be
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addressed immediately. we need to provide the right mix of incentives and regulation. for industries where the economics of the industry are tied to regulatory format, the current regulatory structure can be used to motivate needed cyber advancement. for industries where the economics are not inherent to regulatory structure, it will impede innovation, making us less secure. we need to motivate by providing appropriate incentives to spur investment. one example is the bill that passed the intelligence committee couple of weeks ago that uses liability reforms to stimulate additional information sharing. liability reform is only one of many reforms that need to be unleashed. others include better use of
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government procurement, a rare use of private insurance, streamlined permitting, and others. this was spelled out in the cybersecurity contract in 2008 and endorsed by president obama in 2009 by the multi trade association and civil liberties coalition white paper on cyber security and 2010. a great deal of work needs to be done to fill out how these incentive models can be used in the various sectors. in the meantime, congress ought to enact reform and should do a good deal to better coordinate amongst themselves. passing that package would be a historic and politically achievable goal. ladies and gentlemen, you are dealing with the invention of gunpowder. mandating a thicker armor is not going to work anymore than building it deeper moats would
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stop the invaders who have catapults. we needed their approach, a contemporary and creative approach that engages the private sector with government, not having the government control what the private sector does. we look forward to continuing to work with you. >> thank you for your testimony. our final witness is phyllis schneck. thank you for being here today. we look forward to your comments. >> good morning members of the subcommittee. thank you very much for the opportunity to be here and thank you for your interest in cybersecurity. i testimony will focus on four
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areas of the threat landscape. first a bit of background. my background, i was raised in this back in the days of the radio tower. my father taught me to write code. i was taught the responsibility of that and the responsibility of the computing power we have. i wrote grant the private sector side of the fbi program for eight years. i chair the national board of directors that brings together the top analysts from the banking, telecom, pharmaceutical sectors and other organizations and have helped arrest four hundred cyber
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criminals worldwide in the past two years. mcafee is based in santa clara. we protect business, government, and consumers all over the the world from an full spectrum of cybersecurity attacks. we enjoy driving the innovation that goes directly into hardware. the adversaries can get in in several different ways, but when a hardware knows not to execute an invasion. there are two kinds of companies and agencies across the world, public sector and private. we are looking at the mass movement of money markets and jobs between countries and companies and looking at the threat of destruction. the enemy is faster and smarter than we are at times.
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they are certainly faster. they have no legal, no intellectual property, and policy boundaries. in many cases they have plenty of money. it leads us to the role of the internet service provider. now we haven't announced that of routes, but we have an ability and a great infrastructure run by the isp that delivers traffic reliably. the enemy has used our great infrastructure that we built as the good guys of the world as a master executive transport system for malware. isp's can play a better role in cybersecurity. one thing they can do is help detect this traffic in the network fabric. i will explain that in just a moment.
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imagine if the network fabric was smart enough not to route and the traffic of an adversary. demand more secure technologies from the markets. they cannot carry the burden alone. it is up to every system, every company and user to harden their enterprise. one of the challenges the isp faces. what are the challenges we face today? we have the act of 1986 that prevents sharing information outside the telecoms. legally, we cannot combine our information together. secondly, it costs a lot of money and users are not willing to pay the difference. we need some help leading to some policy recommendations and proactive actions. at mcafee, it costs 160 million and points.
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other companies do this, telecoms, and we can share that information. keep the enemy out. we are working to enable the government to put that information together to not only provide liability protections for privacy and civil liberties, but to balance out what we have had up to now. we can feed it and have a growing and breathing to have it served us in return. they can help us. then we can help them.
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we have to work on this legal and policy network for global information sharing. i look forward to answering any questions. >> very impressive testimony. thanks for all of the work you do to try to keep us secure. we will now go into our question faiz. mr. clinton, you talk about incentives, and you were fairly specific. can you dive down a little deeper in terms of what that means in terms of more specifics on the incentives that would make a difference here. >> we are supportive of the approach that was articulated in the house report, which suggests a menu of incentives need to be developed because different industries are responsive to different things. the banking industry may respond to insurance incentives. you need to have a set of incentives. on the other hand, you need to have some agreement as to what
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needs to be incentivized. for that, what we have suggested it in the multi-trade association paper that i spoke of before, we need to have some entity that does not create the standards or practices, but simply evaluate them. and underwriters lab for cyber security, if you will. and organizers would choose to elect a higher or lower level of adoption based on their business plan, and their business plan would be improved because they would have access to lower liability costs, lower insurance, a better chance to get a federal contractor, etc.
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we are saying we need a new system, not a government mandated system, but a new system where there are government roles and independent roles, such as this underwriter's laboratory, and then responsibility for the owners and operators. in those sectors of the economy where the economics is already built into a regulatory model, then you can use that to regulatory model. for example, if you are dealing with utilities. they have generally fairly detailed regulatory structure. the problem they're having is that they get mandates at one level and the funding at another. there will have to be a correlation done on the government side. basically, we think you need an independent set of entities indicating what needs to be incentivized. it can be done on a continuing basis and the industry needs to implement them.
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>> when you and your sister were trading packets when you should have been sleeping, obviously, -- >> and doing their homework. >> yes, doing your homework and then turn out the lights. that was the threat to this computer. now we understand it to be broader than the networks that can be taken down. can you describe what those threats like and what should happen there? >> absolutely. we did that over a 1200 baud modem over a phone line. >> i remember a 300 baud modem or you put the phone into a
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coupler. >> the threat looks at an instruction that execute off the side of memory, not the piece that holds the word- processing program, but where your computer grabs the next instruction -- what do i do next. i am controlling my world on your machine, whether i am telling it to send out a lot of traffic or i just something that might change the settings on circuit relays. my world is being executed on your machine. you can buy these exploits on the net. you can even use botnet that looked together like quicken. you are relying on someone else's piece of code. we see 66,000 pieces of code everyday called malware. it is to catch the pieces that are spreading across the internet. i cannot forecast the weather without the weather from all the different states and countries. that comes from the neighboring information sharing. but also, to detect instruction that is doing something is true not do. that means i can run even if the enemy doing something that it should not do. that means i can run even if the enemy gets in.
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we need to simply be resilient to that. and that is the ability to work at the operating system level. know what is good and do not let anything else run. that application why this thing in the community. and then understanding at the hardware level what should be accessing and ought not be, and then just block it. >> i'm glad you are on our side. [laughter] maybe that should have gone through an fcc approval process for a merger. it would never have happened. [laughter] all right, now we get serious. i will turn to my friend and colleague from california who brings so much to this debate and this issue for five minutes of questions.
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>> i want to thank each one of you for your outstanding testimony. i think this is one of the best panels that has been assembled on a given subject matter. it is highly instructive. i cannot help but feel that this is like trying to get socks on to an octopus, though. it is massive. i think we have a pretty good idea of what the threat is. i do not think we have a clear picture of what to do with it. there are still many agencies. there was a mention of a 1986 log that i want to hear more about. we have talked about private- public partnerships. we know 95% is in the private sector and 5% in the government. where do we begin with this?
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what are the legal roadblocks as any of you see them right now that are holding us back to do what my next question would be -- what is the new paradigm? and if we have very good pieces in place right now, what do we keep and what should we get rid of? to dr. schneck, do you agree with this notion of mr. clinton's of an underwriter's loud? that sounds very interesting to me. i do not know who wants to begin with what. maybe with legal roadblocks that you mentioned. are you familiar with 1986? i am not, and what is blocking. >> i am not a lawyer. >> neither am i..
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>> the overall reason i mentioned that is that the adversary has at the ability to act on this very quickly because they have no roadblocks. we have the ultimate weapon, and that is, the infrastructure that works at the speed of light. if we can put the instructions together and the intelligence together to work together to detect the virus and it knows that it does not belong there, that it can work to do so. we need the internet to do the same thing. the routers that route our traffic, we need them to do the same thing. we have to combine the information in the private sector with the information and data in the government sector. some of those logs actually prevent the isp from combining that data. i do not have the answer for legally making network.
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but we have to find a way to put together at the indicator level this address, this location could hurt you, and make that acceptable to a router at several hundred gigabyte. >> what you just described, would that fit in with mr. clinton oppose the idea of an underwriters lab? or not? >> i think it is different. >> did anyone ever tell you that you look like david gergen? >> i am pretty flattered. i hear david is upset. [laughter] we hear about different things, first of all, with respect to the legal issues. after he got elected, president obama appointed us to do a 60- day review of its cyber security with the council staff. the largest document in that is appendix "a" going through all of the legal barriers. that is a place to start print
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essentially, we have a bunch of laws that are written for an analog world, and we are now in a digital world. we still have laws on the books about how to manage your videotapes. i have not had a videotape in quite awhile. there's a lot that can be worked out to modernize things. we have suggested that some of those things are regulatory and could be offered as incentives. you know, to get away from some of these burdens. some of them are duplicative auditing requirements. we are all for auditing, but it should be a cyber security audit. you passed that audit and you do
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not have to do the rest. there are multiple state, local, federal, different agencies involved many organizations are spending their time and money doing redundant things. the last thing on where you start, i would strongly suggest that congress start by cleaning up the federal government's role and responsibilities. that is a much more limited system. you can make a lot of progress really quickly while we are continuing to work with the private-public partnership model that we have. >> thank you. i am out of time. >> i will yield to the gentleman from nebraska. it strikes me we ought to get this appendix "a" and maybe have a task force of this subcommittee that gets into that more deeply. we have people with great experience here. where do we start, mr. clinton? >> i would start, first of all, at the federal level. we need to straighten out roles and responsibilities with the federal government and between government at the federal and local and state level. for example, i mentioned the problem we have in the utility sector where we have mandates that exist at one level and the funding comes at another level. what we have to do is realize
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that solving some of the cyber security problem is going to cost us some money. unfortunately, when you have a state public utility commissioners, they are resistant to increasing the rate base. this is understandable, but we have to find some way to get a pass-through on some things. a good review on scrubbing the governmental issues is one place to start. simultaneously, we have a lot of activity going to the public-private partnership that could use a number of these things. the mr. rogers bill is a good example. and we need a good concentrated effort on working on these other programs the senate has started. for example, what do we need to do to get the insurance agencies to be bigger players?
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>> in what way? >> cyber insurance is one of the most effective pro-social motivators that we have. people drive better, give up smoking, etc. >> cyber insurance? >> sure, the problem that we have is that the shared data runs into antitrust problems. if we could get them to share that, perhaps in a public- private partnership, we would get a realistic view of what the threat is. if we shared data we could get a realistic view of what the threat is. we think this could bring down insurance rates. if you bring down insurance rates, more people by the insurance. and we get a virtuous cycle
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going on. and we can use insurance to motivate better cyber security investment. >> mr. dix, a question for you, and you can add on if you want. you mentioned that most businesses, small businesses, is a matter of cyber hygiene. what does that really mean? what can we do as small business people, or whatever? >> again, as i mentioned, you need a comprehensive and sustained awareness campaign that tells the constituencies how to protect themselves from the infection in cyberspace. leveraging resources in federal government, such as the small business administration and the u.s. postal service and other agencies that interact with businesses and citizens every day would be a place to help message that. like we did with h1n1, where we have sustained public services announcements that drive people to get inoculation. we can drive people to places
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where they can learn basic best practices, things they can do to protect themselves. if i might add, another piece of the fundamental blocking and tackling is to ensure operational capability that presents something like a national weather service's four cdc capability where we have a picture of what is going on in the network all the time. i raise that because, many of us work together through the national intelligence advisory committee that recognized a joint coordination center, a joint, public-private,
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operational capability center for prevention and mitigation. we have got to get on top of this. most of our time now spent on recovery. the problem we get into his legal barriers. once we began to try to integrate the capability with the government, the lawyers told us that they could not talk to us. they could not share this information. we should have an operational capability that has a picture as to what is going on in the network at all times. we have those kinds of data feed available, organizing and having a national weather service or cdc-type of capability is long overdue. >> the delmont time has expired. i believe mr. waxman is next. >> thank you very much, mr. chairman. dr. schneck, what special considerations due to the growing number of smart phones and tablet present? and anyone can answer this. >> smart phones and tablets are just small computers. they have the exact same vulnerabilities that all of the other machines you are used to. and they have tons of memory,
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like the guidance systems the first powered rockets to the moon. when you think about that technology, if it is not dot secured, it could enable someone to get into your platform. people are wanting to use their home device at work. what happens is adversaries have discovered they can use this through applications like angry birds. there are ways to lock them down. but we manage that worldwide, but you are looking at a massive explosion of devices. these devices leverage the clout because they do not have as much processing power. your personal information, most likely, is all over your phone if you lose it, you want to make sure you have the remote capability to destroy that.
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it is a wonderful device, but again, anyone with access to that has access to your personal information. it brings a wonderful new sense to computing, and also some wonderful new dangers. mobility is multiplying. >> every once in a while i talk to hackers just to see what they are up to, and recently, one of them told me that the price of a tool kit to hack and iphone is about $200,000 on the
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market. four other funds, it is only about $10,000. this will force us to pay more attention to the big service providers, the i s p's, the cable companies. responsibility will shift away from the edge, away from the consumer to the service provider. >> if you look at metcalf's lot and if you look at what happened with apple and at&t, the value has shifted. it has shifted to the end point. i will give you a good example. the threat that i talked about, going and out of band or using a mobile network is a sure-fire way to stop the kind of transaction today. it is safe and protected. it uses digital signature through a wireless carrier
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network and on the mobile device. that is why it costs a lot more to hack through an ipad or an iphone than a regular mobile phone. if you think you're going to stop all of this in the network an ip address is no longer the identity. the number-one thing that people fake is who you are, what you are, and the application of who you are. and that is the hardest thing to combat in terms of good guys versus bad guys. he has fake your identity. and no technology, no network can deal with that until they deal with the end point itself. >> i do not think we are in disagreement.
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the authentication technologies that you are talking about will ultimately depend on the service provider. >> let me ask you one question. i do not have much time. many of you have indicated that your networks are critical to the infrastructure sectors. how does that relate to this committee addressing cyber security of communications networks? does anyone want to respond? >> in the opening remarks a few of you mentioned something is going on at ntia, at fcc that could reduce risk. one of the things that we have talked about is this measure to get service providers to adopt a code of conduct in dealing with malware. the sec has an effort to promote the use of dns security. not to get too complicated, but this is a growing vulnerability. it is relatively easy to fix.
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other countries have moved faster than the u.s., something we could probably do on collaborative spaces. as far as other responsibilities and protocols, you do not want the government creating technology. but you do may be want to coordinate a response. when you look at fcc or ntia, this is where you can play a big role. >> with the committee's indulgence, we are all going to ask you about australia, and then we all forgot. would you mind addressing the australia? >> phyllis talked about this as
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well. in your isp probably have a pretty good idea of what is going on with your computer at home. they do not do very much about it. bob talked about this as well. there are basic hygiene things that most people do not do. your isp has a fairly good knowledge when you are running across malware, when you are running a botnet. not perfect knowledge, but pretty good knowledge. and in australia -- and they are not the only country who does this anymore -- at one point, they thought the attorney general would come in and tell the isp's what to do. the isp's were not doing anything. there was a failure of incentive. and australia is a little easier because it is a smaller country. and they said, how about we come up with a voluntary code of conduct that will let us deal with the malware threat.
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and with the help and guidance of the attorney general and the australian police, which are roughly equivalent to some of our federal agencies, it works pretty well. it will not deal with an advance threat. name a country that is the biggest supplier of botnets used in cyber crime. it is the united states. it is not because we are criminals, but because we are incompetent in hard offenses. the australian model changes that. we are number one. germans have a lighter approach. you'll get a pop up on the screen that says, we notice you are infected. call this number if you want help. the australians and other countries that do this say, click here and we will clean
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your computer for you. a few other companies do not go public. they will this intervene without your knowledge. you have a privacy issue and you want to be careful about that. should we isolate infected users? should we cut them off from the internet? some countries have said, i'm just going to cut you off. it is a big issue. in these countries, there is a major drop in the rate of infection. this works. it would be useful if we followed the australians, the germans, the japanese, the turks. >> i will give you two other points on australia that are relevant to this group. australia is looking at their energy grade, and granted it is a little different in architecture than the u.s. -- more like ireland and others. but in the process of working with them, we are starting with the infrastructure park and the
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actual production side of the energy creation. the one, to lock down within the systems, within the creation of the power, and then going through the export of the power as it extends through the grid to the carriers and all the way to the end point. also, we are involved with other companies here in the u.s. helping them do that. the other piece is, they look at health care. they think that is an area at in terms of being able to have health care card. a novel idea when you get to privacy concerns here. as i said, you cannot have privacy security without policy. >> thank you. thanks for the indulgence of the committee. i will go to the doctor. >> i have a quick point, if that is okay. australia is a beautiful example of this need for
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information sharing. the isp's do not know what is going on in your computer. they do not watch your banking or your work. they see a behavior from a block of addresses as a footprint as it tries to send traffic as the isp tries to protect you from malware. and from that, they can see where a ridiculously large volume, for example, has come in in a short time frame. it could be infected with certain code, and in the australian model, they let you know. the question becomes, how do they let you know. this is a great picture. it shows how we could get an actual larger picture. that is where we get the pretty weather map picture that mr. dix recommends. also, you need to start looking at these incentives.
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how do we incentivize the general public to use these things? most people do not know what is on their computer while they are sleeping. if they knew, they would clean it up. that is why we need these incentives. >> i appreciate that. and i appreciate the committee's indulgence. mr. rogers. >> i know we are short on time. are you familiar with the company that used to be diginotar? >> very much so. >> i think it would be useful for the committee to hear the story and how are a viable company went away within a month >> if you look at the internet when it was created, the little yellow lock that everyone sees on their browser and on their pc, they think they are saved. very few people know what it means.
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it is supposed to mean a communication path between you and the website you are communicating with, and who is on each end with that. the problem is that in the ssl world, the identity on each side of that may or may not be who it is reported to be. we co-chair a new standard on that called a standard evaluation because if you go even with the last week to your suitable site, you will see people hosting and selling that small lock for $20. the problem is that the identification on that is pretty lax. the issue was, this one company that provides the little yellow

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